RG & Associates Newsletter – JUNE 15, 2018
2018 has already seen many changes in the world of public accounting. Tax reform is a priority for most, but there are also major changes in lease accounting for financial statements, changes in how non-profits account for restricted funds, and continued issues with identity theft and phishing scams trying to steal your information.
As a part of our “summer hours”, we are closing the office on Fridays in June and July. We will also close the office on Fridays in the month of November. We want our staff to enjoy summer with their families and friends after putting in so many hours last busy season!
The topic of tax reform and the changes it brings continues to dominate our email in-boxes. We have summarized the changes to individual tax provisions that will affect the majority of our clients in this newsletter. Next month we will tackle the corporate provisions.
INDIVIDUAL TAX PROVISIONS
Standard Deduction/Personal Exemptions
All personal exemptions are gone, but to make up for it, the bill nearly doubles the standard deduction to $12,000 for single taxpayers, $24,000 for married taxpayers, and $18,000 for heads of households. Elderly and blind taxpayers will still receive an additional deduction.
Child Tax Credit
In light of the previously discussed repeal of personal exemptions, the child tax credit was doubled to $2,000 per qualifying child. The maximum “refundable” portion is $1,400. A new credit of $500 has been created for dependents who are not qualifying children. The phase-out threshold is now $200,000 for single taxpayers ($400,000 for married taxpayers), allowing many more filers to receive the credit.
Pass-through Income Deduction
Perhaps the most talked about, but maybe the least understood, the pass-through income deduction sounds simple enough – a deduction is allowed for up to 20% of Qualified Business Income (QBI). QBI is defined as the net of qualified items of income, gain, deduction, and loss with respect to qualified trade or business of the taxpayer.
There are two important items excluded from QBI – (1) investment income such as short and long-term capital gains and losses, dividends, and interest income, and (2) W-2 wages paid to a shareholder of an S-corporation and payments to partners of partnerships for services rendered. To summarize, an individual adds to their QBI the wages they take from an S-corp or guaranteed payments taken from their partnership. Further, the business must be conducted within the United States; and the deduction is taken at the partner/shareholder level on their individual 1040s.
To calculate the deduction, first an individual with multiple S-corporations and partnerships figures the QBI deduction for each entity. These amounts are then combined. The deductible amount may be limited (1) by wage and capital limitation and/or (2) whether the business is a specified service trade or business. Lastly, the overall deduction is limited to the lesser of the combined QBI deduction OR the overall limitation (20% X taxpayer’s taxable income in excess of any net capital gain).
The wage and capital limitation complicates the calculation considerably. It limits the QBI deduction to the lessor of the originally calculated deduction (20% of QBI) OR the greater of –
- 50% of the W-2 wages for the business.
- 25% of the W-2 wages for the business plus 2.5% of the business’ unadjusted basis in all qualified property (i.e. – the original basis of depreciable assets still in service at the end of the tax year).
Special rules will also apply to specified agricultural or horticultural cooperatives. It is also phased-out for specified personal service trades (such as accounting, health, law, etc.) to individuals with overall income less than $157,500 ($315,000 for married-filing-jointly returns).
It is easy to see how this supposedly simple deduction can become complicated. Some other things to keep in mind regarding the deduction –
- The deduction is a “below-the-line” deduction, meaning that it will not lower Adjusted Gross Income (AGI) and have any impact on deductions subject to AGI limitations (IRA deductions, child-tax credit, etc.)
- The deduction cannot be taken in a year there is a loss in the entity.
- The deduction can be used by the taxpayer even if they do not itemize.
- The deduction is only for federal income tax purposes.
For any divorce agreements entered into after 2018, alimony payments are no longer deductible by the payer or included in the taxable income of the payee.
The moving expense deduction is repealed. Also, moving expense reimbursements are no longer excludable from income. Special rules apply for active members off the military.
With the increases in the standard deduction, fewer taxpayers will find themselves itemizing. The limitation on itemized deductions is also repealed. Specifics on particular itemized deductions are as follows:
- Medical expenses- The 7.5% income limitation returns for all taxpayers. This was changed to 10% in recent years.
- State and local taxes- The deduction for all state and local income or property taxes is limited to $10,000. This change will force many of our clients, who normally itemized, into using the standard deduction.
- Mortgage interest – Taxpayers are allowed to deduct interest on qualifying acquisition debt up to $750,000, changing from the current limit of $1,000,000. Home equity interest is no longer deductible, unless specifically used to improve your personal residence. These changes take effect only on new mortgages, meaning mortgage interest on loans entered into before the passage of the bill are grandfathered-in under current law.
- Charitable giving- Payments made to obtain collegiate athletic event seating are no longer deductible.
- Misc. deductions- Previous miscellaneous itemized deductions subject to 2% are no longer deductible.
Some items of note regarding itemized deductions:
- Some states enacted legislation to allow taxpayers to make “charitable contributions” to certain identified state charities in lieu of paying their state income tax balance due. The IRS and members of Congress have already referred to these work-arounds as “gimmicks”, and have begun to take actions to outlaw their use. We do not see this as a viable option to turn state tax payments (limited to $10,000) to charitable contributions (unlimited by the new law).
- Property taxes for rental properties remain fully deductible. We see potential planning opportunities in turning vacation and second homes into rental properties to maintain deductions.
Taxpayers may distribute up to $10,000 per student from a 529 plan to tuition at an elementary or secondary school.
Taxpayers are no longer allowed to undo a Roth conversion.
Alternative Minimum Tax (AMT)
The AMT remains, however; the amount of the exemption has been increased to $109,400 for married-filing-jointly taxpayers. The phase-out threshold has been increased to $1 million. Far fewer taxpayers will be subject to the AMT.
Estate and Gift Tax
The amount has doubled to $11.2 million per person ($22.4 million for a married couple).
Individual Healthcare Mandate
The penalty for not having insurance is reduced to $-0-, effectively eliminating the healthcare mandate for all individuals.
If you have any questions or need any clarification on any of these items please do not hesitate to contact us! We want you to avoid any surprises this April. Look for our July newsletter on the corporate tax provisions next month!
11920 Burt Street, Suite 160
Omaha, NE 68154
phone – 402.614.4315
fax – 402.614.2110
email – email@example.com